Monday, February 29, 2016

The U.S. is so awash in crude oil that traders are experimenting with new places to store it: empty railcars.

Thousands
of railcars ordered up to transport oil are now sitting idle because
current ultralow crude prices have made shipping by train unprofitable.
Meanwhile, traditional storage tanks are running out of room as U.S. oil
inventories swell to their highest level since the 1930s.

Some
industry participants are calling the new practice “rolling storage”—a
landlocked spin on the “floating storage” producers use to hold crude on
giant oil tankers when inventories run high.

The combination
of cheap oil and surplus railcars has created a budding new side
business for traders. J.P. Fjeld-Hansen, a managing director for trading
company Musket Corp., tested using railcars for storage last year and
found he could profit by putting the oil aside while locking in a higher
price to deliver it in a later month.

The company built a
rail terminal in Windsor, Colo., in 2012 to load oil shipments during a
boom in U.S. oil production. Now, Mr. Fjeld-Hansen says, “The focus has
shifted from a loading terminal to an oil-storage and railcar-storage
business.”

Energy Midstream, a trading company based in The
Woodlands, Texas, stored an ultralight oil known as condensate on Ohio
railcars last month for about 15 days before shipping it to a buyer in
Canada.

Dennis Hoskins, a managing partner at Energy
Midstream, says there are so many unused tank cars that he is constantly
hearing from railcar owners hoping to put them to use. “We get offers
everyday for railcars,” he said.

The use of railcars for
storage could be limited by the cost of track space and safety and
liability concerns that have followed a string of high-profile transport
accidents. Issues range from leaky cars to the risk of collisions and
fires.

Federal regulations require railroads that store cars
loaded with hazardous materials like oil to comply with strict storage
and security measures to keep the cars away from daily rail traffic.
Railroads and users face responsibility for leaks, collisions or other
mishaps.

“I don’t want the liability,” said Judy Petry,
president of Oklahoma rail operator Farmrail System Inc. “We prefer not
to hold a loaded car.”

Still, the oil has to go somewhere. The
surge in shale-oil production has created a massive glut that the
industry is struggling to absorb. BP PLC Chief Executive Bob Dudley
joked in a speech this month that by midyear, “every storage tank and
swimming pool in the world will be filled with oil.”

Khory
Ramage, president of Ironhorse Permian Basin LLC, which operates a rail
terminal in Artesia, N.M., said he hears regularly from traders looking
to store crude in his railcars.

Crude-storage costs “have been
accelerating, just due to the demand for it and less room,” he said.
“You’ll probably start seeing this kick up more and more.”

U.S.
crude inventories rose above 500 million barrels in late January for
the first time since 1930, according to the Energy Information
Administration.

The cheapest form of storage—underground salt
caverns—can cost 25 cents a barrel each month, while storing crude on
railcars costs about 50 cents a barrel and floating storage can cost 75
cents or more. The cost estimates don’t include loading and
transportation.

Railcars hold between 500 and 700 barrels of oil, less than a cavern, tank or ship can store.

The
use of U.S. railcars to transport large volumes of oil picked up steam a
few years ago as a byproduct of the fracking boom. Fields sprung up
faster than pipelines could be laid, so producers improvised and shipped
their output to market by rail. Companies soon realized railroads
offered greater flexibility to transfer oil to whomever offered the best
price. Some pipeline companies even joined the rail business, building
terminals to load and unload oil. U.S. oil settled Friday at $32.78 a barrel, down nearly 70% from mid-2014.

The
plunge in oil prices brought that activity to a halt. Analysts estimate
there are now as many as 20,000 tank cars—about one-third of the North
American fleet for hauling oil—parked out of the way in storage yards or
along unused stretches of tracks in rural areas.

Producers
and shippers who signed long-term leases for the cars during the boom
are stuck paying monthly rates that typically run $1,500 to $1,700 per
car. Traders can pay those prices and still profit. Oil bought at the
April price and sold through the futures market for delivery a year
later could net a trader $8.07 a barrel, not including storage or
transportation costs.

As central storage hubs fill up, oil
companies are more willing to pay for expensive and remote types of
storage, said Ernie Barsamian, principal of the Tank Tiger, which keeps a
database of companies looking to buy and sell oil storage space.

The Tank Tiger posted an inquiry Wednesday on behalf of a client seeking 75,000 barrels of crude-oil storage or space to park 100 to 120 railcars loaded with crude.

Mr.
Barsamian likened the disappearance of available storage to a coloring
book where nearly all the white space has been filled in.